Economics: Principles & Policy
14th Edition
ISBN: 9781337696326
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning
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Chapter 13, Problem 7DQ
To determine
The impact of setting a higher price.
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A new entrant, Bargain Airways, cuts air fares between Eastwich and Westwich by 20 percent. Biggie Airlines, which has been operating on this route, responds by cutting fares by 35 percent. What does Biggie hope to achieve? If air transportation were perfectly contestable, why would Biggie Airlines fail to achieve the ultimate goal of its price cut?
The graph below represents Sammy Limited as a regulated monopoly. A) If Sammy Ltd. is focusing on a socially optimal price which point would highlight such, and how much would be the price? Justify your answer. B) If the ATC at that point is $5.50, would Sammy Limited earn a profit/loss/breakeven at the price highlighted above? Justify your answer.
The following question has three parts. Part I. Consider two firms each producing a version of a
differentiated good and facing the following system of demands:
Pi = a — bqi — dqj, i, j = 1, 2, i ‡ j where a=84, b=21, d=12. Assume firms marginal costs are
equal to zero. Firms compete for an infinite number of periods.
Suppose that firms compete as Cournot oligopolists. What is the minimum discount factor necessary
to sustain collusion using grim-trigger strategies? [Report your answer with three decimals of
precision.]
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